Strategic Partnerships: The Emperor's New Clothes

In Hans Christian Andersen’s story, The Emperor’s New Clothes, two tailors promise their leader a suit that is invisible to anyone unfit for office.
Everybody goes along with it: the Emperor not wanting to appear incompetent, the people not daring to challenge him. In clinical trial outsourcing we are
witnessing a similar phenomenon, except that our Emperor is the pharmaceutical executive, our tailors are the large CROs and our invisible suit is
strategic partnering. In the children’s story, of course, it takes the foolhardy effrontery of a young boy to expose the truth. I’d like to cast myself in
that boy’s role for this article.

Strategic partnership deals are the fashion in our space, with numerous public announcements in recent years.1 And there have been a number of reviews and
commentaries on the trend, most of which conclude that strategic partnerships are beneficial to the sponsor companies implementing them.1,2,5 A good
summary of the popular view has been provided by industry observer Kenneth Getz, who says: “Partnerships hold promise in establishing long lasting relationships that benefit from strategic insight into & engagement in future portfolio needs. Under these relationships,
sponsors partner with fewer CROs . They gain the assurance of dedicated global capacity and expertise under shared governance, coordinated communication and issue resolution and integrated operating processes and systems.”2

My italics there highlight the elements Getz associates with strategic partnerships and these recur throughout the literature, along with others such as economies of scale, risk sharing and trust. But what value is associated with each of these features? Are the benefits real?
Where is the evidence?

The British mathematician and philosopher Bertrand Russell once said: “Never let yourself be diverted either by what you wish to believe, or by what you
think would have beneficent social effects if it were believed. But look only, and solely, at what are the facts.”3

This is a useful approach to take when examining strategic partnerships because, although the vision of collaborative sponsor-CRO alliances — that is,
we’re all in it together — might sound appealingly noble, facts demonstrating real added value are hard to find and reasons to doubt are many. In Table 1,
I’ve listed some common-sense objections to each strategic partnership feature, but you will rarely hear these mentioned in the debate as, conveniently,
facts are ignored in favour of righteous platitudes.

Just examine the literature. The main benefit said to arise from strategic partnerships is the promise of savings. However, the only company that appears
to have put their name to a figure on this is Eli Lilly (20% on data management & monitoring)5 and in that case there is no detail provided around how
the saving was achieved or measured. Meanwhile, there is evidence that savings are not materialising in the partnership space, with last year’s RW Baird
Survey suggesting CRO costs have increased, particularly for large pharma where the majority of the strategic partnership deals have been created.6

In a nutshell there are two big problems with strategic partnerships in our industry. The first is that they are not strategic and the second is that they
are not partnerships.

What Does ‘Strategic’ Mean?

The concept of strategic purchasing can be traced back to a seminal paper by Peter Kraljic published in Harvard Business Review in 1983.7 Kraljic
explained how suppliers can be classified in terms of their cost and the risk they present of failing to supply (perhaps failing to recruit patients).

The implications of Kraljic are shown in Figure 1. When assessing suppliers we calculate what the supply failure risk is versus cost, which gives us a
definition of value. Now, if awarding an entire portfolio it is reasonable to position small CROs at point A representing low cost but high risk, while the
larger, better established CROs might occupy point B representing high cost with lower risk. Of course the place any buyer would like to be is at point C,
but that isn’t very realistic. Instead the goal might be to get to point D and the message is that it may be better to do that by investing in mitigating
the risk of a low cost provider than by negotiating discounts with an established one.

The investment to support a provider is a real strategic approach. Procurement professionals call it ‘supplier development’ and it is clear to see how such
a philosophy might lend itself more readily to engaging cheaper, riskier, smallerproviders. In our industry, however, we have made it a
pre-requisite of strategic partnerships that the provider is large and global.

Kenneth Getz observes: “Small and mid-sized CROs have largely been left behind while major CROs — the only organizations with sufficient scale and diverse
talent — service a growing number of integrated relationships.”2

This prevailing attitude reduces the science of procurement to mere shopping and is very reminiscent of the old phrase “nobody ever got fired for hiring
IBM.” Strategic purchasing should be about mitigating supply failure risk, but in our space nobody ever talks about that in the same breath as strategic
partnering. The single biggest risk of supply failure — not recruiting patients — is never mentioned. The focus instead is on discounts and, for me, it’s
depressing that such tactical, point-of-contract saving-mechanisms are constantly being touted as strategic solutions when frankly they are not.

However, due to the $125 billion patent cliff our industry faces, pharmaceutical executives are desperate to focus on savings — immediate savings — that
can only be reported through tactical means. So pharma talks strategic, but acts tactically and nobody can blame the big CROs for making some money out of
the situation. So it’s like the Emperor’s New Clothes. It wasn’t the fault of the tailors. The Emperor brought his predicament entirely upon himself.

Partnerships and the Risk Dynamic
In the Journal of Clinical Research Best Practices, Ronald Waife writes: “[T]here is nothing to be gained by characterizing service providers as
partners… the criticism of a pay-for-service relationship in favour of something somehow more lofty is misplaced and misleading.”8

True partners are defined as such because they share interests, risks and profits. However, in Waife’s analysis, sponsor risks and profits are high, while
CRO risks and profits are more modest. But on this detail I tend to disagree, because my observation for the subset of CROs who have cornered the strategic
partnership market is that they actually generate profits (as a percentage of earnings) comparable to those of their clients.

Just consider the market. Private equity companies have been scrambling to get into the CRO business over the last 8 years, with 14 formerly public CROs
having moved into private ownership.9 Such investors don’t go hunting acquisitions inindustries where profits are modest and, all the
while, strategic partnering is where they most want to be. The acquisition activity associated with this has driven a consolidation of CROs and economists
tell us that as the number of suppliers decreases so prices rise in the pursuit of profit.10

This is especially true in the supplier base for strategic partnerships because, remember, we have made it a pre-requisite of strategic partnerships that
the provider is large and global. And this has limited our options, with one analyst claiming that the six largest CROs now account for 50% total clinical
CRO revenues.11 This means a market that economists describe as ‘oligopoly’, characterized by, among other features, high profits for the suppliers.10

It would be OK for the CRO side of the partnership to enjoy high profits if they shared the risk but, as Waife points out, this is where the partnership
concept really breaks down:

“The CRO’s risk in non-performance is mostly one of tarnished reputation… [but] responsibility for failure is usually obscure… [and] sponsors are
notoriously loathe to pursue penalties. If there is a sanction it would most likely be loss of work. But … sponsors routinely continue to give work to
service providers who have failed them.”8

Put simply, risk sharing does not exist between customer and service provider… and you cannot have a partnership without shared risk. Waife and I espouse
the same solution for this dilemma: accept that the risk is always with the client, who should therefore take responsibility for managing the risk.

And taking responsibility for risk means the sponsor needs to be in charge; be the boss, not a partner. This is no semantic point. Partnerships create
governance hierarchies built around issue escalation and nannying project teams, often placing CRO personnel in committees where they are equal or senior
to sponsor personnel. This blurs the distinction between customer and service provider and harms delivery. We should tear down traditional governance and
replace it with a lean system where pharma focuses on risk and quality management and the CRO gets on with delivering its services.

Waife concludes: “[Why] not just pay your CRO for competent work without all the ‘partnership’ trappings? Look at any recent press release announcing a new
sponsor-CRO partnership. Every single service or advantage listed… can be purchased… from that CRO… without a partnership agreement.”8

Waife might as well say that partnerships in our space are like lipstick on a pig. You can dress up service delivery as something more beautiful, but it’s
still service delivery. Any suggestion the sponsor might benefit by subscribing to the partnership fantasy is groundless in fact and potentiallydangerous.

Conclusion

In summary, strategic purchasing is something buyers do to mitigate the risk of supply failure, a risk that, fundamentally, cannot be shared
because service providers have different interests to their sponsors. Meanwhile, a partnership describes a particular type of relationship where
risks are genuinely shared because interests are shared. Put together therefore, the two concepts represent an oxymoron that logically cannot be fit for purpose and provides a classic example of how an appealing idea can become popular despite
practically zero evidence in support of claimed benefits.

It has probably not escaped your notice that should (as would seem likely) the risk/cost profiles of CROs described in Figure 1 vary significantly between
trials (so that, for a given trial, a cheaper CRO may also sometimes be less risky) then a policy of radically limiting one’s supplier base will impact the
possibility of achieving best value from one trial to another. Thorough study of this dynamic — considering total cost of ownership in order to fully
understand the pros and cons of limiting one’s options — is therefore essential for any sponsor considering its sourcing strategy. Taking such an evidence-based approach is well rehearsed in the procurement profession, where it is called ‘value analysis’. However, to my
knowledge, no such analysis has ever been undertaken prior to implementing a preferred provider policy for clinical trial outsourcing.

Adoption of procurement best practice is what has been missing in clinical trial outsourcing as pharmaceutical executives have preferred a wild goose chase
for the utopian dream of partnering with service providers. I would add that when sponsors accept that they alone own their risk — that they cannot share
it via misconceived partnerships — then they can justly demand full transparency and slim profit margins from CROs who, ring-fenced from risk, will have no
excuse not to comply. Perhaps only then will sponsors secure the ultimate prize of reducing real costs rather than recognizing imaginary savings…and
subscribing to the myth of the Emperor’s New Clothes.